The tribunal also concluded in the case of Chrys Capital Investment Advisors India (2010-TII-11-ITAT-DEL-TP), that in case expenses incurred by a taxpayer on behalf of associated enterprises (AEs) are included in operating costs, any reimbursement pertaining to such expenses must be included in operating revenue while computing profitability under the TNMM method.
Chrys Capital Investment Advisors India is an Indian company which is engaged in the business of carrying out research and scouting activities for management companies to identify entrepreneurs and portfolio companies requiring assistance in terms of capital infusion, strategic direction and financial advice. During the financial year 2004-05, the taxpayer benchmarked its international transactions under the TNMM with
The transfer pricing officer (TPO) however proposed transfer pricing adjustment based primarily on the following observations:
The TPO considered interest, dividend, income from investment operations, trading in bonds and capital market operations and so on, as operating income while determining arm’s length price under the TNMM; and
The TPO considered reimbursement of certain expenses received by the taxpayer from the AEs as non-operating income while treating the corresponding expenses as operating in nature.
The tribunal rejected the addition proposed by the TPO and made the following observations:
Non-operating incomes (such as interest, dividend, income from investment operations, trading in bonds and capital market operations) cannot be considered while determining profit margin under the TNMM; and
In case certain expenses are considered as operating expenses, any reimbursements in relation to those expenses must be considered as operating revenue.
With both the Indian transfer pricing regulations and the
The OECD has also taken note of the operating or non-operating debate and has now provided detailed guidance on this issue in its proposed revision of chapters I-III of the existing transfer pricing guidelines. The judgement by the Delhi Tribunal in Chrys Capital is consistent with the proposed revision of the OECD transfer pricing guidelines. Under the proposed revision, it is recommended by the OECD that interest income and expenses other than with respect to trade receivables and payables should generally be excluded when applying the TNMM method to non-financial transactions, where they relate to the capital structure of the business and not to the operating return from the business activities.
The tribunal has also upheld that reimbursements received by a taxpayer from its AEs must be treated as operating revenue where the underlying expenses are treated as operating expenses. However, the judgement has not dealt with the issue as to how these reimbursements should be factored in while computing profit margin under the TNMM method. In other words, whether these should be netted off from the corresponding expenses or whether reimbursements should be included in operating revenue while the corresponding expenses are included in operating expenses. The first approach would definitely be more beneficial to the taxpayer.
Based on economic principles, it may be argued that the netting-off approach may be followed where the reimbursements pertain to expenses but are not germane to the taxpayer’s economic activity. In these instances, comparables’ operating expenditure would also not include similar expenses thus justifying the netting-off approach. However, in cases where the taxpayer receives reimbursements for expenses which are an integral part of the taxpayer’s operations, both the reimbursements received from
Manoj Pardasani (mpardasani@kpmg.com) and Manish Sabharwal (msabharwal@kpmg.com) BSR & Co.
