By CA.

Deepender Kumar
Deepender Anil & Associates
Chartered Accountants
E-mail: deepanilassociates@gmail.com
Mob. No.: 9910099584

 Instruction No. 15/2015

Notification dated 19th October,
2015
M/s. Tata Consultancy Services Vs.
DCIT (18th Nov, 2015)
M/s. Knorr-Bremse India Pvt. Ltd.
Vs. ACIT (24th Nov, 2015)
M/s. Trend Micro India Pvt. Ltd. Vs.
DCIT (20th Nov, 2015)
Fin Min to clean-up trade transfer
pricing norms to make doing
business easy

Revised and Updated Guidance for

Implementation of Transfer Pricing
Provisions

CBDT issues instruction No. 15/2015 replacing

Instruction No. 3 dated May 20, 2003 to give
guidance to AO and TPO regarding transfer pricing
assessments
1. Reference to Transfer Pricing Officer (TPO)
AO must record his satisfaction as jurisdictional requirement,
that there is income/potential income arising from international
transaction before proceeding to determine ALP on his own
or making a reference to TPO, in following circumstances
(i) No accountant's report filed by assessee, but international
transactions entered by assessee have come to the notice of
AO;
(ii) Taxpayer has not declared one or more international
transaction in Form 3CEB which has come to AO's notice;
(iii) where transaction is declared in Form 3CEB with qualifying
remarks to the effect that such transaction is not international
transaction or it does not have impact on taxpayers income
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 In case no objection is raised by the taxpayer

to the
applicability of Chapter X [Sections 92 to 92F] of the Act,
then the prima-facie view of the AO would be sufficient
before referring the international transaction to the TPO for
determining the ALP.
However, where the applicability of Chapter X [Sections
92 to 92F] of the Act to the facts of the taxpayer's case
is objected
to, the assessee's objection
should be
considered and specifically dealt with so as to make
sufficient compliance with the principles of natural justice.
Making a reference to TPOs on
the basis of value of
international transactions is no more necessary as selection of
TP cases for scrutiny is to be based on risk assessment,
consequently when a case is selected for scrutiny for non-TP
issues, no reference to TPO is necessary irrespective of value
of international transactions
Only exception to above would be a situation where AO notices
undisclosed international transaction during assessment
proceedings due to non-filing of Form 3CEB/ non-reporting of
such transaction in Form 3CEB

2.

Role of Transfer Pricing officer

The TPO, being an Additional/Joint CIT,
shall obtain the
approval of the jurisdictional CIT (TP) before passing the
order. On the other hand, the TPO, being a Deputy/Assistant
CIT, shall obtain the approval of the jurisdictional
Additional/Joint CIT before passing the order
The jurisdictional CIT (TP) should assign a limited number of
important and
complex cases, not exceeding 50, to the
Additional/Joint CslT [TPOs] working in the same jurisdiction
TPO's order being subject to judicial scrutiny, must contain
adequate reasons/data regarding selection
of
most
appropriate method, data used for computation of ALP and
copies of all relevant documents in this respect to be made
available to AO for his record and use at subsequent stage
of appellate and penal proceedings
Instruction also highlights role of TPO in compliance audit in
pursuance to APA signed and regarding safe harbour provisions
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3. Maintenance of Database
References received from the AOs by the TPOs in his jurisdiction
are dealt with expeditiously and accurate record of all events
connected with the whole process of determination of ALP is
maintained in the format enclosed as Annexure-I to this
Instruction.
The CslT (TP)must ensure that the separate data maintained by
all TPOs under their jurisdiction are consolidated into one report
for the entire charge after the completion of each transfer pricing
audit cycle.
4. Applicability
Guidance provided in instruction applicable only to scrutiny of
'international transactions' and CBDT is considering issue of
separate guidance for specified domestic transactions
However, guidance regarding cases selected for scrutiny on
non-TP parameters also applicable to specified domestic
transactions
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CBDT notifies transfer pricing (TP) rules to incorporate

range concept and use of multiple year data
1. Applicability
Amended Rules applicable to international transactions and
specified domestic transactions undertaken on or after April 1,
2014
2. Selection of comparables and use of multiple year data
The Notification provides that for the purpose of analyzing the
comparability of an uncontrolled transaction with the related
party transaction, the data pertaining to current year in which
the related party transaction has taken place should be
considered.
However only in cases, where RPM, CPM or TNMM is selected as
the most appropriate method and the current year data is not
available at the time of furnishing the return of income, the data
pertaining to the immediately preceding financial year (to the
current year) should be taken into consideration for analyzing
the comparability of an uncontrolled transaction.

 Consequently, if more than one price is determined (i.e. more than

one comparable is selected) by using any of the most appropriate
method, the data values of the comparable set shall be
determined as follows:
a) In case of RPM, CPM and TNMM, where the current year data of
comparable is available and
if the comparable has also undertaken similar uncontrolled
transaction/s in immediately previous two financial years,
the most appropriate method shall be applied in similar
manner to the preceding two financial years also and the weighted
average data
values of the three years shall be considered.
b) In case of RPM, CPM and TNMM, where the data for financial
year preceding to the current year is used and the comparable has
also undertaken same or similar uncontrolled transaction in the
year immediately preceding year (to such financial year), then the
weighted average data value of these two years shall be
considered.
c) Where CUP, PSM or Other method is applied, the data for only
current year shall be used to determine the data values of the
comparable set.
The data values so determined for comparables shall be placed in
an ascending order for determining the ALP (dataset).

3. Range of Arms Length Price

The ALP shall be determined on the basis of data set so

constructed as follows:
Situation 1
- In cases where CUP or RPM or CPM or TNMM is used; and
- The data set used comprises of 6 or more comparables
The ALP shall be the prices falling within 35th to 65th
percentile of the above dataset. Accordingly, if the price at
which the related party transaction is entered into by the
taxpayer (transaction price) falls within the range of 35th
to65th percentile, such transaction price shall be regarded
as ALP. However, if the transaction price does not fall within
the range of 35th to 65th percentile, the median of the
dataset shall be regarded as ALP of the related party
transaction.

Situation 2
In cases where PSM or Other Method is used; or
Where the number of comparables in the data set for CUP,
RPM,
CPM or TNMM is less than 6 in numbers
The ALP shall be the arithmetic mean of all the values included
in the data set. Additionally, the variation of +/- 3% (as per the
erstwhile law) shall be allowed in such cases for determining the
ALP.
4. Determination of ALP at the time of assessment
proceedings
The Notification provides that at the time of assessment
proceedings, the comparables selection may be modified in
case of RPM, CPM and TNMM as follows:
if a comparable selected on the basis of preceding financial
year data does not satisfy comparability parameters based on
the current year
data (available at the time of assessment
proceedings), it shall be deleted; and

if any new comparable is available which satisfies the

comparability
parameters, it shall be included in the
comparable set for
determining the arms length
price.
5. Applicability of Tolerance Band (+/-3%)
The variation of +/-3% can be applied in case of use of
multiple year data, but shall be of no use, where the Range
Concept becomes applicable.
Stresses that amended rules would provide clarity in
determination of price in TP cases and reduce
disputes on TP issues and further, that it is a part of
continuing initiative of providing a stable and certain
direct tax regime

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ITA No. 7513/M/2010

A.Y. 2005-06

ITAT asks Tax Officials to use good judgement before

sending Tax Demands
In the case between Tata Consultancy Services and the deputy
commissioner of income tax, the Mumbai ITAT observed, ...it is
only after proper application of mind to all the facts and holding a
prima facie belief that the AO can make a reference to the TPO,
or that the ld.CIT(A) can grant approval to such a reference.
AOs as well as CITs must analyse each case, the tribunal said in
the order. They must apply their minds instead of referring cases
to transfer pricing officers mechanically.
The ruling will have a bearing on many current transfer pricing
disputes and may prompt companies to ask for the quashing of
tax demands raised by the revenue department, said some
industry officials.
"Theoretically, many companies could claim that the transfer
pricing was slapped by the revenue department, mainly the AOs
and the CIT, without analyzing the case. This could also mean
that many companies would expect that the tribunal must delete
all the adjustments made," a person familiar with the
development said.

 "This judgment may benefit the corporate sector in getting their

transfer pricing demands quashed since the process of automatic
reference to the TPO for international transactions of more than Rs
5 crore, as laid down under theCBDTcircular, had done away with
the independent application of mind by the IT officers," said a
partner of a renowned law firm.
India has been one of the toughest places for transfer pricing
transactions, accounting for about 70% of the global disputes and
2% ofglobal trade, according to International Tax Review, 2014.
The tribunal's decision came when theNarendra Modigovernment
is trying to ease transfer pricing rules. While the tribunal's order
could be challenged in court, it may become a key reference point
until a final judgement is issued, according to industry officials.
"There are a large number of transfer pricing matters in the
tribunal and assessees will now take this stand because in most
cases, the references by the AO to the TPO are "automatic" and it
will be very difficult at this stage for the tax department to show
that the AO or the CIT have applied their mind," a person close to
the development said.

ITA No. 182 & 172 of 2013

A.Y. 2007-08

Mere profitability not indicative of ALP; Reverses ITAT

conclusion on intra-group services
Facts of the case
The assessee, Knorr-Bremse India Pvt. Ltd, is a wholly owned
subsidiary of Knorr- Bremse Asia Pacific (Holding) Limited (KBAP).
During AY 2007-08, the assessee entered into various international
transactions with its AEs, for availing professional, management
and SAP consultancy services rendered by AE, and various other
transactions and adopted TNMM on aggregate basis
The TPO however, determined the ALP of the professional,
management and SAP consultancy services received from AE at
NIL, using the CUP method and held that benchmarking of the
transactions under TNMM was not correct as each transaction was
to be benchmarked separately. The DRP confirmed the TPOs action
for all 3 transactions
ITAT rejected the TNMM in respect of the said three transactions
and upheld the TPO and DRPs adoption of the CUP Method in
respect thereof.
As regards ALP of SAP consultancy charges, the DRP had recorded
that SAP license and MS office had been purchased at a lower rate
and to that extent, the assessee must be given benefit and
accordingly, ITAT directed the AO to delete the addition on that
account.

Conclusion by High Court

Rejecting assessees stand for aggregation of transactions
under TNMM holds that Merely because the purchase of each
item and the acceptance of each service is a component leading
to the manufacture/production of the final product sold or
service provided by the assessee, it does not follow that they
are not independent transactions for the sale of goods or
provision of services
Each transaction had to be treated (prima facie) as separate
and independent of each other, in the absence of assessee
establishing that the various transactions formed a composite
agreement / various agreements with the various group entities
were part of one single indivisible transaction / pricing
Sets aside ITAT order upholding TPO's determination of ALP at
Nil for professional, management and SAP consultancy services
availed by assessee from various AEs, remands matter to ITAT
for ALP redetermination
Distinguishes reliance on HC decision in Sony Ericsson since the
same related to consideration of AMP as an overall transaction
where TNMM was adopted, and therefore it was held that it
could not be segregated and valued as separate transaction

 HC agreed with assessees reliance on the Delhi HC

decision in CIT Vs EKL Appliances Ltd, observing that mere
absence of profit would not be a ground for holding that the
transactions are not genuine and ought not to be taken into
consideration in the assessment proceedings and holds
thatMere profitability does not indicate that the
transaction which was responsible for the
enhancement of the profits was at an arms length
price

ITA No. 1585/Del/2015

A.Y. 2010-11

Revenue cant challenge own comparables absent

CIT(A)/ DRPs direction; Distinguishes Quark SB-ruling
Facts of the case
The assessee is primarily engaged in providing pre-sales and
post-sales services, marketing and other technical services to
the clients on behalf of its AE, namely, Trend Taiwan and also
imports certain services from its AE.
The TPO accepted other international transactions at ALP
except Rendering of services. So, rejected the application of
CPM and use of multiple year data. He applied TNMM as the
most appropriate method with the use of current year data
alone. DRP allowed certain relief to assessee by reducing the
addition made by TPO with Rs. 10,43,575/ The controversy is only against inclusion of 3
companies in the final set of comparables by the TPO,
namely, Apitco Limited, Global Procurement Consultants
Limited and TSR Darashaw Limited.

Observations by ITAT
ITAT answers the primary question whether Revenue can argue
for exclusion of companies treated by AO/TPO themselves as
comparables
States Revenue is fully empowered to assail correctness of the order
passed by CIT (A) / DRP, however , holds that the AO/TPO can under
no circumstance be aggrieved with his own view taken in the
assessment order independent of any external influence of the DRP
etc.
Opines that allowing Revenue to argue that decision taken by AO/TPO
was wrong and certain companies included by the TPO himself should
be deleted, implies that AO is challenging the correctness of his own
decision before the Tribunal, which is illogical
Observes that present situation (in which Revenue, without having
right of appeal, is contesting against intentional inclusion of
comparables by AO/TPO) is in contradistinction to situation
considered by ITAT Special Bench in Quark Systems Pvt Ltd (wherein
inadvertent inclusion of comparable by assessee was considered)

Highlights that after amendment vide Finance Act, 2012 to Sec

253(2A)/(4), Revenues power to file appeal / cross objection is
restricted only to cases where objection is to the direction of DRP
and not against voluntary action of AO himself
Holds that although Tribunal has the power to voluntarily direct
AO/TPO to reconsider correctness of comparables, in no case can
the Revenue argue against such inclusion, however clarifies that
Revenue fully empowered to set such adverse position right by
taking recourse to other remedies available, if any

Accordingly, remits ALP recalculation of rendering of

services transaction after excluding 3 comparables
contested by assessee, and refuses to adjudicate on
remaining 4 comparables contested by Revenue

 India proposes a major clean-up of decade-and-a-halfold rules

that govern the prices of imports by related parties - such as
arms of multinationals from their parent - in an attempt to reduce
delays and disputes and make it easier to do business.
The finance ministry is not just looking at changing the rules but
also the process itself, which is riddled with delays and
cumbersome paperwork.
"There is a need for a fresh look at these rules..A lot of water has
flowed over 14 years," a finance ministry official told ET.
Transactions between related parties usually do not follow normal
business dynamics in terms of pricing, making the role of tax
authorities relevant. Tax law mandates that such transactions
should be carried out on an arms length basis, just as an
enterprise would with any other independent entity.
With 'ease of doing business' the guiding principle, the
government now proposes to make the process swifter and
introduce an electronic interface. One option is to link valuations
to audits, a procedure that's considered more sound and
thorough and followed internationally.

 A dedicated unit, known as the Special Valuation Branch, is

located at Customs houses in the metros for this purpose. This
branch examines how the relationship between an importer and
exporter has influenced the invoice value of imported goods.
Orders issued by a valuation branch are valid for three years,
after which a follow-up reassessment is done. Although
timelines are prescribed, the lack of capacity and reliance on
paperwork usually lead to delays of as much as two or three
years. In the intervening period, imports can be made by
making an extra duty deposit of 1 per cent, which is
refundable.
While batting in favor of switching to an audit to validate import
prices, they also said valuation orders should hold good for
more than three years.
"Rather than examining the import price at the time of imports,
it would be better if it can be done at the time of onsite audit
later. The renewal of special valuation branch's order should be
after five years," said Pratik Jain, a partner at KPMG in India.
Also pointed that though the extra duty deposit of 1 per cent
has to be discontinued if an order is not issued within four
months, in practice it is usually not done and added that this
condition should be strictly enforced.

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