India: Non-resident Taxpayers To Prepare Separate Transfer Pricing Documentation; Cannot Rely On Documentation Prepared By Its Indian Counterpart: Delhi Income-tax Tribunal

Case Summary ¹

• Convergys Customer Management Group Plc (the taxpayer) is a non-resident company incorporated under laws of United States of America (USA) and is engaged in the business of providing outsourced customer, employee and marketing support services as well as comprehensive Customer Management Services;
• The taxpayer has a subsidiary in India; namely Convergys India Services Pvt. Ltd.(CIS/ Associated Enterprise), which provides IT enabled (call centre/back office support) services to the taxpayer;
• As regards the income transactions of the taxpayer, it has earned the following two types of income from its Indian AE:
  • Interest on loan
  • Receipt of fees for technical services
• During the course of assessment, the tax authority alleged that the taxpayer has a Permanent Establishment (PE) in India and accordingly, attributed the portion of its profits to such PE for the purpose of taxation in India. The said issue of PE is presently pending for adjudication by the jurisdictional High Court;
• In the meantime, the first level tax authority levied penalty (equivalent to 2% of the value of international transactions) u/s.271AA of the Income Tax Act (the Act) for failure to maintain TP documentation as prescribed under the Indian TPR;

Issue under consideration: Whether non-resident taxpayers need to separately prepare and maintain transfer pricing documentation u/s 92D of the Act?

• In response, the taxpayer argued that it is not required to follow TPR compliance in India as the transactions with the Indian AE does not qualify the definition of 'international transaction;' the reason for such argument is not clear;
• At the same time, the taxpayer also contended that for meeting its Indian TPR compliance requirements, it has relied on the TP documentation prepared by its Indian AE which essentially covers all transactions between the taxpayer and its Indian AE;
• The tax authority did not accept the justification given by the taxpayer that it has placed reliance on the TP Documentation prepared by the Indian subsidiary to meet the compliance requirement;
• Tax Department representative relied upon Section 92D of the Act and definition of 'person' under Section 2(31) of the Act to argue that every person is mandatorily required to prepare/ maintain its own transfer pricing documentation;
• Hon'ble ITAT after hearing both arguments held as under:
  1. Provisions of Section 92 of the Act, with regards to maintaining the TP documentation, is applicable to all taxpayers (including non-resident taxpayer);
  2. It is mandatory for non-resident taxpayers to obtain an independent accountant's report in Form No. 3CEB and to prepare/maintain Transfer Pricing documentation on its own;
  3. Merely relying on the documentation of Indian AE cannot be regarded as compliance of the Indian TPR and a separate TP documentation has to be maintained by the non-resident taxpayer;
  4. Therefore, the penalty imposed by the tax authority for non-maintenance of transfer pricing documentation is justified.

Our Comments

Tax and TP compliances in India are known to be very taxing! Especially, given its complexity, procedural aspects and the penal consequences for non-compliance.

This judgement of ITAT further emphasizes the need to evaluate the transfer pricing compliance requirements of non-resident taxpayers carefully. Basis this judgement, it is almost certain that there is no exemption from maintaining TP documentation/furnishing accountants report, regardless of the tax position adopted by the taxpayer.

Another important message from the said judgement is that the non-resident taxpayers would have to maintain a separate TP documentation in the format required under the Indian TPR. The taxpayers can not produce the TP documentation prepared by its Indian counterpart to meet their compliance burden.

Recently, in the Budget of 2020, the government announced relief to non-residents from their annual tax return compliances, wherein, the non-resident taxpayers are exempted from filing the annual tax return in India if –

• the nature of income is interest, dividend, royalty, fees for services etc.; and,
• the income was subjected to withholding tax in India as per the rate prescribed under the Indian Income-tax Act (and not the rate prescribed under the treaty).

While the relaxation was given with regard to the annual tax return, no such relaxation was announced towards the annual TPR compliance requirements of non-resident taxpayers.

All in all, it would be a prudent exercise on the part of non-resident taxpayers to re-examine their existing positions with regards to the annual TP compliances in India. It is always crucial and now even economical given the penal consequences for non-resident taxpayers to prepare and maintain a separate TP documentation. The documentation done by the Indian subsidiary can be a base for this purpose; however, it cannot be a substitute for maintaining TP document by the non-resident entity.