Transfer Pricing: Automatic RBI approval means transaction is at Arms Length Price

ThyssenKrupp Industries India Pvt. Ltd vs. ACIT (ITAT Mumbai)

 

The ITAT had two consider two legal issues in the context of transfer pricing (i) whether if a royalty agreement falls within the ‘automatic approval scheme’ and is approved/ deemed to be approved by the RBI, the royalty can be treated to be at arms’ length just because it is approved/ deemed approved and (ii) what are the parameters to be applied while applying “Internal TNMM”. HELD by the Tribunal:

 

(i) The assessee’s collaboration agreement with its AE for payment of 2% of contract value for manufacturing, drawing and engineering services and 5% of the selling price as royalty falls under the “automatic approval scheme” of the RBI. When the rate of royalty payment and fee for drawings etc. has been approved or deemed to have been approved by the RBI, then such payment has to be considered at ALP;

 

(ii) Rule 10B(1)(e)(i) requires the profit margin realised by the enterprise from an international transaction entered into with an AE to be ascertained for determining as to whether or not it is at arm’s length. The margin with which such margin earned by the assessee is compared with for determining the ALP, can be internally available from comparable transaction(s) or from externally available cases. If the enterprise has entered into similar transactions with third parties as are under consideration with the AE, then the profit realized from such transactions with third parties is a good measure to benchmark the margin from international transaction. Thus, on one hand we need to have profit margin which is to be compared from transactions with the AEs and on the other hand, we need to find out the profit margin from similar transactions with non-AEs with which comparison is to be made. Both these figures should come from separate watertight compartments. No overlapping is permissible in the composition of such compartments. In other words, neither the first compartment of profit margin from AE transactions should include profit margin from the transactions with non-AEs, nor the second compartment should have profit margin from the transactions with the AEs. If such an overlapping takes place, then the entire working is vitiated, thereby obliterating the finer line of distinction of the profit margin to be compared and the profit margin to be compared with. On facts, as the assessee had not maintained segment-wise accounts and as the figures of AE and Non-AE transactions were segregated from the common pool of figures, the margins derived therefrom were not reliable and the claim of internal TNMM was not acceptable.

BOJ Moves See Yen Down To Lowest Since June 2009

Expectations that the recent Bank of Japan (BOJ) announcements on measures to combat deflation will debase the Yen further, have seen the currency drop to its weakest level since June 2009.

 

Earlier today the Yen was still trading on the back of recent BoJ monetary policy decisions and the currency is reaching levels which are bound to attract some profit-taking from earlier buyers.

 

On Thursday BoJ officials had said that the central bank will raise its monthly bond purchases to 7.5 trillion Yen ($77 billion), much higher than the 5.2 trillion Yen forecast by economists.

Japan's finance ministry data has shown that Japan's current account surplus, 637.4 billion Yen ($6.5 billion) in February, also had been larger than what the majority of economists had expected.

The BoJ has set a 2 year target to reach 2% inflation and its next policy meeting is scheduled for the 26th of April.

I foresee that the market is bound to price in additional policy announcements leading up to the next meet.

Earlier the Yen, traditionally considered a haven currency, touched 98.85 per Dollar, it's weakest level since June 2009. Last week alone it dropped by 3.4%. The Yen was also lower by 1% to 128.02 per Euro.

In the past 6 months the Yen has dropped in value by 21% while, in comparison, the Dollar rose by 1.8% and the Euro by 1.9%

 

Today the Dollar remained lower as against the Euro, leading up to an announcement by U.S. Federal Reserve Chairman Ben S. Bernanke later in the day, after a report released last week which had shown that U.S. employers had added the least jobs in nine months during March.

 

The U.S. central bank's next policy meeting is scheduled to take place on 30th April and 1st May.

The South Korean Won has declined to its weakest level in over eight months, at 1,140.15 per Dollar, on escalating military tensions on the Korean Peninsula.

Heightened risks of conflict with North Korea has acted as a catalyst for outflows of foreign funds as investors become nervous.

South Korean President Park Geun Hye's office has said that they expect that the North may fire a missile around April 10th although uncertainty persists as to when and if that will in fact happen.

 

 

Italy OKs €40B payment to private sector.

 Italy has approved a plan to pay €40B to settle a giant outstanding balance with private companies, which became a major problem when bank credit to businesses dried up. The government hopes that paying its bills will stimulate the economy, but said the decision to make good on its commitments wasn't easy. "We have to follow a path between helping our economy recover and maintaining budget discipline," Italy's Economic Minister said

Crisis prompts Europeans to hoard dollars.

 The amount of dollar cash in circulation has jumped 42% in the past five years as the proportion held abroad climbed from 56% to nearly 66%. With the eurozone crisis boosting demand since 2010, don't be surprised if the trend strengthens following the raid on Cypriot bank deposits, especially as the EU is preparing a new law that would force haircuts on large deposits in banks that fail.

Portuguese stocks fall after court strikes down austerity measures.

Portugal's PSI 20 was -0.8% at around midday in Europe after the country's Constitutional Court struck down proposed austerity measures, including cuts in public-worker wages and state pensions. The government will look to reduce spending in other areas but warned that the decision makes it "very challenging" for the nation to meet its bailout targets

Arizona bank shut down.

Regulators closed Gold Canyon Bank in Arizona on Friday, bringing the total number of bank failures this year to five. The cost to the FDIC's Deposit Insurance Fund is estimated at $11.2M.

Nikkei soars anew as BOJ gets busy.

 The Nikkei (NKY) jumped 2.8% to 13,192.59, its highest close since August 2008, while the yen-dollar rate dropped below 99 for the first time in four years, as the Bank of Japan began its grand stimulus experiment in its attempt to pull the country out of deflation. The BOJ said it would acquire ¥1T ($10.3B) of Japanese government bonds with maturities of 5-10 years and ¥200B of bonds with maturities exceeding 10 years. At the time of writing, the yen was -1.1% at 98.53 to the dollar.