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Profit Level Indicator – All Related transactions cannot be considered for determining ALP

Sub Logo - Case LawsCLR Editorial Notes: In this particular case, the assessee™s parent company, Digital Microwave Corporation USA, had supplied an equipment to its Indian customers for which the assessee received a decided commission. The equipment was covered by warranty and the service relating to its installation and  annual maintenance was provided by the assessee in India. It is annual returns, the assessee claimed that the receipt of commission and the provision of warranty service subject to transfer pricing regulations as they were international transactions with its Associated Enterprise. The installation & maintenance service, on the other hand,  was an independent transaction with the Indian customer and hence could not be considered while computing the Profit Level Indicator (PLI) for determining the ALP. The Transfer Pricing Officer rejected this claim and held that in computing the profit level indicator of the international transactions involving warranty services and commission income, the operating revenue and operating costs of the installation/commissioning and maintenance services had to be taken.

The CIT(A) & Tribunal upheld the assessee™s claim. On appeal by the department, the High Court dismissed the appeal and held:

“The department™s argument that the installation, commissioning & maintenance services were intricately connected with the international transactions of warranty support services and commission income and that their operating cost and operating revenue had to be considered while computing the profit level indicator is not acceptable because the installation/ commissioning and maintenance agreements were independent agreements unconnected with the transactions of warranty support services and commission income. This is shown by the fact that while the equipment was supplied to 40 customers by the AE, only three of them availed of the installation services from the assessee. Also, a corroborative circumstance for construing the transactions of installation/commissioning and maintenance as domestic transactions was that the TPO had made no adjustment in respect of these transactions. The transactions pertaining to the installation/commissioning and maintenance services were also not deemed international transactions u/s 92B(2) because none of the conditions stipulated therein of a prior agreement existing between the customers of the assessee and the AE have been established as a fact. Moreover, there is no finding that the terms of the transaction of installation/commissioning as well as maintenance had been determined in substance between the customers and the assessee by the AE. In the absence of such finding, it cannot be deemed that the transaction of installation/commissioning as well as provision of maintenance services by the assessee to its domestic customers in India were international transactions falling within s. 92B(2).”

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Case Document available for download

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Tags: Australian Labor PartyCITCommonwealth Law ReportsComparablesIndiaTPOtransfer pricingUnited States

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