I. Pass through costs to be excluded from operating costs while computing the Profit Level Indicator  [McDonalds India (P) Ltd (TS-236- ITAT-2016 (DEL)-TP) dated 12th April, 2016]

The Income Tax Appellate Tribunal (‘ITAT’) held that collection of royalty/ franchise fees from the sub-licensees for onward transmission to the Associated Enterprise (‘AE’) does not create any value addition and accordingly, the same are to be considered as a pass through costs. Such pass through costs are to be excluded from operating costs while computing the Profit Level Indicator (‘PLI’).

The Hon’ble ITAT placed reliance on and the decisions of the Hon’ble High Court of Delhi in the case of DCIT vs. Cheil Communications India (P.) Ltd.  (Delhi) and Johnson Matthey India (P.) Ltd. vs. DCIT (Delhi).
II. Interest earned on FDRs being related to business should be included in operating income while computing the PLI  [Bunge India Pvt Ltd (TS-264-ITAT-2016(Mum)-TP) dated 18th May, 2016]

The ITAT, amongst other issues, held that where the advance received against the exports was immediately placed in FDRs with the bank for the purpose of taking letter of credit in favour of the overseas sellers and not for the sole purpose of earning interest, the interest income was an inherent and an integral part of the business activity and was to be considered as an operating income for the purpose of calculation of operating margin.
III. Arm’s Length Price of royalty payment to AE cannot be determined as Nil  [Commissioner of Income Tax vs. Lumax Industries Ltd ITA 102/2014 Delhi HC dated 28th October, 2015]

In the instant case, the Hon’ble High Court of Delhi reiterated the principles laid down in the decisions of CIT vs. Sony Ericsson Mobile Communication (2015) 374 ITR 118 and CIT vs. EKL Appliances Limited (2012) 345 ITR 241, and held that the entire royalty expenditure could not be disallowed on the ground that it was not necessary since the assessee did receive technical assistance from the Associated Enterprise (‘AE’) for which royalty payment was made.
IV. Participation in management, control or capital is the primary condition to hold two entities as Associated Enterprises  [Suttati Enterprises Ltd (TS-234- ITAT-2016 (PUN)-TP) dated 29th April, 2016

The ITAT held the assessment was barred by limitation where reference was made to Transfer Pricing Officer (‘TPO’) in absence of international transaction. The ITAT ruled that where the enterprises do not fulfill the conditions laid down in section 92A(1) of the Act and where there is no connection whatsoever by way of participation in management, control or capital by the enterprises, either directly or indirectly, they cannot be deemed to be AEs u/s 92A(2). The ITAT also observed that even under Article 9 of the relevant Double Taxation Avoidance Agreement (‘DTAA’), participation in management, control or capital is required to qualify as AE.

The Hon’ble ITAT placed reliance on the decision of Diageo India (P) Ltd. vs. DCIT (2011) 47 SOT 252 (Mumbai).
V. Interest rates of AE country to be considered for outbound loan, use of ‘Loan Connector’ database for benchmarking  [M/s Subex Limited vs. Additional Commissioner of Income tax (IT(TP) A No. 223/Bang/2014) dated 16th March, 2016]

In the instant case, amongst several other issues, the ITAT, following the decision of High Court of Bombay in Tata Autocomp System’s Ltd.,  (Bom),  held that in the transaction of loan to foreign AE, the interest rate of the country of foreign AE is to be considered for benchmarking the interest transaction. Further, the ITAT remanded the verification of ALP of interest rate from Loan Connector Database, as was also directed by the DRP to the TPO.
VI. A comparable cannot be rejected solely on the ground of negative net-worth  [Gillete Diversified Operations Pvt. Ltd (TS-218- ITAT-2016 (DEL)-TP) dated 1st April, 2016]

In the instant case, amongst various other observations relating to corporate tax and transfer pricing issues, the Hon’ble ITAT held that if the company is functionally comparable to the assessee, merely because it has negative net worth, it cannot be excluded unless it is shown that how the negative net worth has impacted the profitability of the comparable company. The Hon’ble ITAT relied on Rule 10(B)(a) and 10(B)(3) of the Income Tax Rules and distinguished the decision of Special Bench in the case of DCIT vs. Quark Systems Limited in 2010-TII-02-ITAT-CHD-SB-TP, where apart from having negative net worth, the comparable was also functionally not comparable.

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