Taxpayer not contract manufacturer as sales and purchases from associated enterprise were negligible

In the case at hand, the taxpayer was engaged in the manufacture of glasses. The taxpayer imported raw materials from an associate enterprise and exported the finished goods to the associate enterprise.(1) The taxpayer also sold products to unrelated parties.

The lower tax authority characterised the taxpayer as a 'contract manufacturer' for the associate enterprise and disallowed the royalty payment made to the associate enterprise (for use of the associate enterprise's technology in order manufacture the exported goods).

The lower tax authority based its finding that the taxpayer was a contract manufacturer on the fact that:

  • the assessee's business model showed that the taxpayer made purchases only from the associate enterprise; and
  • the final products were then exported to the associate enterprise.

The tax tribunal found that the taxpayer had purchased negligible raw materials from the associate enterprise and its sales to the associate enterprise were minimal. The tribunal noted that the total exports to the associate enterprise were only 5% of the taxpayer's total sales. Further, the taxpayer (through the associate enterprise, which acted as an intermediary) sold products to an original equipment manufacturer outside India. In addition, the taxpayer sold its products to unrelated parties in India. As such, the tax tribunal dismissed the lower tax authority's findings and allowed the royalty payment.

Tax tribunal upholds RPM as most appropriate method

In this case, the taxpayer was a reseller of finished watches and clocks.(2) The taxpayer selected the resale price method (RPM) as the most appropriate method to benchmark the resale of its watches.

The lower tax authority contended that RPM was not the most appropriate method, as the taxpayer had incurred losses, which was significant because the taxpayer had carried out value added functions. Based on this information, the lower tax authority rejected the RPM method and found the transactional net margin method as the most appropriate method.

According to the tax tribunal, the records showed that the taxpayer performed no significant value added functions and the packing expenses did not create value for the products. Further, the tax tribunal stated that the expenses in the taxpayer's profit and loss account did not reveal the performance of value added functions. In light of this, the tax tribunal relied on the Bombay High Court ruling in L'Oreal India Pvt Ltd to find that RPM was the most appropriate method for the trader and accordingly rejected the lower tax authority's transfer pricing adjustment.

Dispute Resolution Panel must consider transfer pricing study report furnished late

In a recent case before the Dispute Resolution Panel, the taxpayer was engaged in civil construction.(3) The taxpayer filed its income return but failed to file a transfer pricing study report before the lower tax authority due to timing issues. The taxpayer later submitted the transfer pricing report with the first appellate authority, which rejected the report solely on the basis that it had not been submitted to the lower tax authority.

Aggrieved, the taxpayer appealed to the tax tribunal. The tax tribunal stated that:

  • the taxpayer had to submit its report to the lower tax authority within the time stipulated; and
  • the taxpayer had to furnish a transfer pricing report with respect to its international transactions.

However, the tax tribunal ruled that, in the interest of justice, where a taxpayer submits its transfer pricing report before the first appellate authority, it should not be rejected solely on the basis that the taxpayer failed to first submit it to the lower tax authority.

Based on this finding, the tax tribunal remitted the matter back to the first-instance authority and ordered it to pass an appropriate order based on the merits of the case, as per the transfer pricing report.

Final assessment order cannot be passed without draft assessment order

In this case, an issue had been remanded back to the lower tax authority for fresh adjudication.(4) Based on this, the lower tax authority referred the matter to a transfer pricing officer. The transfer pricing officer proposed a transfer pricing adjustment – which the lower tax authority accepted – and issued a final assessment order without issuing a draft assessment order in the interim, as per the Income Tax Act 1961.

Aggrieved, the taxpayer filed a writ petition before the respective high court, claiming that the final assessment order should be declared null. The high court held that the final assessment order was null but that the transfer pricing officer could propose a new order and conclude the assessment. The high court further held that had the taxpayer and transfer pricing officer both confirmed the draft assessment order, it would have directed that the proceedings be completed based on the final order. However, this had not happened. Accordingly, the lower tax authority was directed to complete the assessment afresh. Thus, the high court found that the final assessment order was invalid.

High turnover is relevant criterion for accepting or rejecting comparable

The taxpayer was an IT-enabled services provider. The issue under question was whether the tax tribunal was right in applying the turnover filter as a criterion for accepting or rejecting a comparable.(5) The tax tribunal had rejected a comparable company which had been selected by the lower tax authority by applying a 10 times range filter. The high court upheld the tax tribunal's finding, thereby negating the reliance placed by the Department of Revenue on the ruling in Chryscapital to hold that the tax tribunal's findings were final.

For further information on this topic please contact Pranay Bhatia at BDO in India by telephone (+91 22 3332 1600) or email ( The BDO in India website can be accessed at


(1) Asahi India Glass Ltd, TS-964-ITAT-2018(DEL)-TP.

(2) Citizen Watches (India) Pvt Ltd, TS-963-ITAT-2018(Bang)-TP.

(3) Mos Metro India Pvt Ltd, ITA 3029/2017, Chennai Tax Tribunal.

(4) Stryker India Pvt Ltd WP(C) 11325/2017 and 46253/2017, Delhi High Court.

(5) Acusis Software India Pvt Ltd, ITA 223/2017, Karnataka High Court.

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