The case is: Eaton Technologies Pvt. Ltd. v. DCIT [ITA Nos. 1621/PN/2011] Assessment Year 2007-08
The taxpayer (an Indian subsidiary) provided customer support service and business support service to the international group.
The taxpayer provided its customer support service from a “software technology park of India” (STPI) unit and claimed a “tax holiday” pursuant to section 10A of the India’s income tax law. The business support services were rendered from a non-STPI location.
The taxpayer was reimbursed on the basis of cost, plus a mark-up. The taxpayer also reimbursed the related-party group for certain pre-incorporation costs.
The Transfer Pricing Officer accepted the taxpayer’s treatment of the customer support service, but (1) rejected the taxpayer’s benchmark of the business support service, using multiple-year data and sought instead to use single-year data of comparable companies; and (2) concluded that the taxpayer’s reimbursement to the group for its pre-incorporation costs was an international transaction that ought to have been benchmarked.
The Dispute Resolution Panel agreed with the Transfer Pricing Officer’s findings, as did the Assessment Officer.
The Pune tribunal concluded that the risk adjustment claimed by the taxpayer for the support services had not been properly addressed by the tax authorities and remanded this issue for additional consideration.
Concerning the taxpayer’s payment to the related party for reimbursement for the pre-incorporation expenses, the tribunal found that while the arm’s length rule generally would apply, the taxpayer had not claimed and in fact had “disallowed” the expense in computing its taxable income. Thus, the taxpayer had not realized any benefit in the assessment year or in later years (by capitalizing the amount and claiming depreciation).
Read a February 2013 report [PDF 200 KB] prepared by the KPMG member firm in India: Transfer pricing provisions are not applicable, when taxpayer suo-moto disallows expenditure in the nature of international transaction and does not claim any benefit for the same in subsequent years
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