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Arm's Length Principle - Mumbai Tribunal Rejects Use of Multiple Year Data
In a significant ruling, the Mumbai Bench of the Tribunal in the case of Symantec Software Solutions Pvt Ltd has ruled on several important issues concerning the application of Transfer Pricing provisions. While there have been similar decisions on the use of multiple year data and availability of 5 percent safe harbor benefit, the present ruling is significant for its conclusions on the use of comparable data, which was not available to the taxpayer at the time of preparing the documentation. The conclusions on the issue of risk adjustments and application of turnover as a comparability criteria are also important in this ruling. Taxand India reviews the specifics of the case.
The Tax authorities routinely reject the use of multiple year data and seek to use data, which was not available to the taxpayer at the time of preparation of Transfer Pricing documentation. Whilst the Tribunals have been taking a technical view on use of multiple year data, it is imperative for tax payers to demonstrate that the use of past years' data does indeed influence the determination of transfer price and this has to be accomplished at the documentation stage.
Further, Tribunal's interpretation on use of data subsequenty available goes against the grain of contemporaneous documentation as per OECD principles and is bound to be challenged by the tax payers.
In the recent budget, the time limit available to taxpayers for maintenance of Transfer Pricing documentation was extended from September 30 to November 30. While this would improve the availability of data for the taxpayers to a limited extent, it would still not be possible to access complete data of comparables by the specified timelines. Overall, the risk of the Tax authorities determining a higher ALP based on subsequently available data continues and the present ruling only lends support to the approach of the Revenue. Taxpayers could consider this risk of adjustments while determining their transaction prices. The ruling also stresses the importance of a deeper analysis of comparability factors supported by quantifiable data, while seeking to apply filters such as turnover filters and while carrying out risk adjustments. It underscores the need for a robust analysis of comparability factors and a good understanding of the fast evolving approach of the Tax authorities and Courts concerning the application of Transfer Pricing principles.
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