Tag: Lack of reliable information

India vs Akzo Nobel India Pvt Ltd, September 2022, High Court of Delhi, ITA 370/2022

India vs Akzo Nobel India Pvt Ltd, September 2022, High Court of Delhi, ITA 370/2022

The tax authorities had disallowed deductions for purported administrative services paid for by Akzo Nobel India to a group company in Singapore. The Income Tax Appellate Tribunal upheld the assessment in a Judgement issued in February 2022. An appeal was then filed by Akzo Nobel India with the High Court. Judgement of the High Court The High Court dismissed the Appeal of Akzo Nobel India and upheld the judgement of the Income Tax Appellate Tribunal. Excerpt “…this Court finds that all the three authorities below have given concurrent findings of fact that the Appellant had failed to furnish evidence to demonstrate that administrative services were actually rendered by the AE and the assessee had received such services. In fact, the ITAT has noted in the impugned order “….On a specific query made by the Bench to demonstrate the receipt of services from AE through cogent evidence, including, any communication with the AE, learned counsel for the assessee expressed his inability ... Read more

§ 1.482-1(e)(5)Example 3.

Arm’s length range limited to interquartile range. (i) The facts are the same as in Example 2, except in this case there are some product and functional differences between the four uncontrolled comparables and USSub. However, the data is insufficiently complete to determine the effect of the differences. Applying the resale price method to the four uncontrolled comparables, and making adjustments to the uncontrolled comparables pursuant to § 1.482-1(d)(2), the district director derives the following results: Uncontrolled comparable Result (price) 1 $42.00 2 44.00 3 45.00 4 47.50 (ii) It cannot be established in this case that all material differences are likely to have been identified and reliable adjustments made for those differences. Accordingly, if the resale price method is determined to be the best method pursuant to § 1.482-1(c), the arm’s length range for the controlled transaction must be established pursuant to paragraph (e)(2)(iii)(B) of this section. In this case, the district director uses the interquartile range to determine the arm’s length range, ... Read more

§ 1.482-1(e)(5)Example 1.

Selection of comparables. (i) To evaluate the arm’s length result of a controlled transaction between USSub, the United States taxpayer under review, and FP, its foreign parent, the district director considers applying the resale price method. The district director identifies ten potential uncontrolled transactions. The distributors in all ten uncontrolled transactions purchase and resell similar products and perform similar functions to those of USSub. (ii) Data with respect to three of the uncontrolled transactions is very limited, and although some material differences can be identified and adjusted for, the level of comparability of these three uncontrolled comparables is significantly lower than that of the other seven. Further, of those seven, adjustments for the identified material differences can be reliably made for only four of the uncontrolled transactions. Therefore, pursuant to § 1.482-1(e)(2)(ii) only these four uncontrolled comparables may be used to establish an arm’s length range ... Read more

TPG2022 Chapter II paragraph 2.109

While it is not specific to the transactional net margin method, the issue of the use of non-transactional third party data is in practice more acute when applying this method due to the heavy reliance on external comparables. The problem arises because there are often insufficient public data to allow for third party net profit indicators to be determined at transactional level. This is why there needs to be sufficient comparability between the controlled transaction and the comparable uncontrolled transactions. Given that often the only data available for the third parties are company-wide data, the functions performed by the third party in its total operations must be closely aligned to those functions performed by the tested party with respect to its controlled transactions in order to allow the former to be used to determine an arm’s length outcome for the latter. The overall objective is to determine a level of segmentation that provides reliable comparables for the controlled transaction, based ... Read more

TPG2022 Chapter II paragraph 2.71

Application of any arm’s length method requires information on uncontrolled transactions that may not be available at the time of the controlled transactions. This may make it particularly difficult for taxpayers that attempt to apply the transactional net margin method at the time of the controlled transactions (although use of multiple year data as discussed in paragraphs 3.75-3.79 may mitigate this concern). In addition, taxpayers may not have access to enough specific information on the profits attributable to comparable uncontrolled transactions to make a valid application of the method. It also may be difficult to ascertain revenue and operating expenses related to the controlled transactions to establish the net profit indicator used as the profit measure for the transactions. Tax administrators may have more information available to them from examinations of other taxpayers. See paragraph 3.36 for a discussion of information available to tax administrators that may not be disclosed to the taxpayer, and paragraphs 3.67-3.79 for a discussion of ... Read more

OECD COVID-19 TPG paragraph 24

In the specific circumstances of the COVID-19 pandemic, the application of more than one transfer pricing method may be useful to corroborate the arm’s length price of a controlled transaction. In this context, it is important to note that the arm’s length principle does not require the application of more than one method and that the use of more than one method should follow the guidance in paragraphs 2.2 and 2.12 of the OECD TPG ... Read more

OECD COVID-19 TPG paragraph 23

Where possible, and on a temporary basis during the pandemic, tax authorities that otherwise use the price-setting approach could consider allowing taxpayers, for those controlled transactions affected by the pandemic, to take into account information that becomes available after the close of the taxable year in filing their returns (where legally permissible and properly described in the transfer pricing documentation). Tax administrations could provide flexibility to allow amendments to FY 2020 tax returns such that transfer prices are set on an arm’s length basis and using available information. Also given the potential for double taxation that may arise as a result of unilateral adjustments, consideration may be given by tax administrations to: Provide for flexibility in the allowance of “compensating adjustments” to be made before the tax return is filed, where it is legally permissible, in order to allow for any available contemporaneous information to be better evaluated by taxpayers and tax administrations such that arm’s length prices can be ... Read more

OECD COVID-19 TPG paragraph 22

The OECD TPG describe two approaches to identify and collect data required to undertake a transfer pricing analysis. The first is a “price-setting,” i.e. an ex-ante approach, which uses historical data updated to reflect any change in economic conditions through the date of the contract. The second is an “outcome-testing” approach, which may incorporate information that becomes available after the close of the taxable year to determine arm’s length conditions and report results on the taxable year to determine arm’s length conditions and report results on the tax return. According to the OECD TPG, both approaches, or a combination of these approaches, are found among OECD member countries.11 11 Paragraph 3.71 of Chapter III of the OECD TPG ... Read more

OECD COVID-19 TPG paragraph 21

The difficulty posed by the delayed availability of contemporaneous data on comparable companies or transactions may have been exacerbated by the COVID-19 pandemic. Taxpayers and tax administrations should be mindful that determining a reliable arm’s length outcome requires flexibility and the exercise of good judgment.10 Difficult transfer pricing issues that arise as a result of the COVID-19 pandemic could give rise to a large number of mutual agreement procedure (“MAP”) disputes that could severely strain the resources of tax administrations. As such, tax administrations are encouraged to keep these complexities in mind when performing risk assessments, evaluating transfer pricing positions on audits and considering the support and documentation taxpayers provide that might demonstrate reasonable efforts and care when trying to comply with the arm’s length principle. Taxpayers should undertake reasonable and appropriate due diligence in evaluating the likely effects of the COVID-19 pandemic and in implementing appropriate changes in their transfer prices. MNE groups should document the best available market ... Read more

OECD COVID-19 TPG paragraph 20

The discussion below provides several pragmatic approaches to this issue. Tax administrations could consider these pragmatic approaches in an attempt to minimise disputes where taxpayers are making good faith efforts to determine arm’s length prices in the context of the information deficiencies associated with the COVID-19 pandemic. However, these approaches would not be appropriate in cases where taxpayers seek to use the circumstances attached to the COVID-19 pandemic to manipulate their pricing strategies in a way that is inconsistent with the arm’s length principle ... Read more

OECD COVID-19 TPG paragraph 19

Data from independent comparable transactions or companies from other time periods, such as average returns in preceding years, may not provide a sufficiently reliable benchmark for the current period without considering the specific impact of the pandemic on the controlled transactions under review ... Read more

OECD COVID-19 TPG paragraph 18

As the economic circumstances caused by the pandemic are continuing and evolving over time, taxpayers may encounter difficulties in determining arm’s length conditions due to the lag in time between the occurrence of controlled transactions and the availability of information regarding contemporaneous uncontrolled transactions ... Read more

TPG2017 Chapter II paragraph 2.109

While it is not specific to the transactional net margin method, the issue of the use of non-transactional third party data is in practice more acute when applying this method due to the heavy reliance on external comparables. The problem arises because there are often insufficient public data to allow for third party net profit indicators to be determined at transactional level. This is why there needs to be sufficient comparability between the controlled transaction and the comparable uncontrolled transactions. Given that often the only data available for the third parties are company-wide data, the functions performed by the third party in its total operations must be closely aligned to those functions performed by the tested party with respect to its controlled transactions in order to allow the former to be used to determine an arm’s length outcome for the latter. The overall objective is to determine a level of segmentation that provides reliable comparables for the controlled transaction, based ... Read more

TPG2017 Chapter II paragraph 2.71

Application of any arm’s length method requires information on uncontrolled transactions that may not be available at the time of the controlled transactions. This may make it particularly difficult for taxpayers that attempt to apply the transactional net margin method at the time of the controlled transactions (although use of multiple year data as discussed in paragraphs 3.75-3.79 may mitigate this concern). In addition, taxpayers may not have access to enough specific information on the profits attributable to comparable uncontrolled transactions to make a valid application of the method. It also may be difficult to ascertain revenue and operating expenses related to the controlled transactions to establish the net profit indicator used as the profit measure for the transactions. Tax administrators may have more information available to them from examinations of other taxpayers. See paragraph 3.36 for a discussion of information available to tax administrators that may not be disclosed to the taxpayer, and paragraphs 3.67-3.79 for a discussion of ... Read more
India vs Herbalife International India , April 2017, Income Tax Appellate Tribunal - Bangalore, IT(TP)A No.924/Bang/2012

India vs Herbalife International India , April 2017, Income Tax Appellate Tribunal – Bangalore, IT(TP)A No.924/Bang/2012

Herbalife International India is a subsidiary of HLI Inc., USA. It is engaged in the business of dealing in weight management, food and dietary supplements and personal care products. The return of income for the assessment year 2006-07 was filed declaring Nil income. The Indian company had paid royalties and management fees to its US parent and sought to justify the consideration paid to be at arm’s length. In the transfer pricing documentation the Transactional Net Margin Method (TNMM) had been selected as the most appropriate method for the purpose of bench marking the transactions. The case was selected for scrutiny by the tax authorities and following an audit, deductions for administrative services were denied and royalty payments were reduced. Disagreeing with the assessment Herbalife filed an appeal. Decision of the Income Tax Appellate Tribunal The Tax Appellate Tribunal dismissed the appeal of Herbalife and upheld the tax assessment. Excerpts “The appellant had not filed any additional evidences to prove ... Read more