INDIA Trends and Developments Contributed by: Mukesh Butani, Seema Kejriwal, Pranoy Goswami and Mansi Mathur, BMR Legal
Further, tax tribunals have been insisting on the satisfaction of five tests (need, benefit, rendi - tion, non-duplication and non-stewardship) and robust documentation before deciding in tax - payers’ favour. The Mumbai Tribunal’s ruling in the case of CLSA (ITA 6748/Mum/2017) empha - sises the importance of quality documentation in defending IGS transactions. Intra-group financing Intra-group financing in India is largely in the form of loans, convertible debentures and guar - antees. Indian tax laws provide for thin capitali - sation rules. Intra-group loans and guarantees are also closely scrutinised by tax authorities during audit. Very recently, a Special Bench of the Tribunal in the case of Hyderabad Infratech Private Limited (ITA-TP No 1856/Hyd/2019) ruled that the interest payment is to be benchmarked with reference to the rate of interest applicable to the loans extended in the currency concerned. In another recent ruling, the Hyderabad Tribunal in the case of Cyient Limited v DCIT (ITA No 913/ HYD/2024) observed that both corporate guar - antee and comfort letter have an in-built obliga - tion to receive the payment to lender on behalf of the borrower. Hence, the issuance of a comfort letter is an international transaction which needs to be benchmarked. Interestingly in the case of Asian Paints v ACIT (ITA No 268/Mum. /2018), the Mumbai Tribunal distinguished an order of an earlier year. In the earlier year, the Tribunal had held that a letter of comfort is not an inter - national transaction, however, in the latter year, the taxpayer itself disclosed a comfort letter as a contingent liability. The Tribunal distinguished the previous year on facts and ruled that a letter of comfort is an international transaction, espe - cially given that the taxpayer had itself reported it as an international transaction.
Intangibles The transitional nature of intangibles, and their growing eminence in the corporate landscape, adds another layer of scrutiny when the authori - ties come across transactions involving intan - gibles. Advertising, marketing and promotion (AMP) spending agreements are being chal - lenged using DEMPE principles. Tax tribunals, however, are demanding more stringent proof of the application of DEMPE to AMP transactions. Furthermore, the Indian courts have strategically distanced themselves from Bright Line Test (BLT) conceptualised in American jurisprudence. Per - sistently, judicial opinions have stressed adher - ence of acceptable legal principles, as opposed to international outdated methodologies. Another facet of intangible assets, that is encountering extensive examination and inter - national traction in the transfer pricing frame - work, is royalty payments to related parties. A notable case that stems from disallowance of royalties, was adjudicated by the High Court of Delhi (Samsung India Electronics, ITA 40/2018 (2024)). The taxpayer, Samsung India, was a licensed manufacturer and paid royalties to an associated enterprise (AE). Samsung India made sales to both related parties and asso - ciated enterprises outside India. The tax office recharacterised the operations of Samsung India as “contract manufacturing” to the extent that it made sales to its associated enterprises. The Court observed that the revenue had not brought anything on record to support its asser - tion of contract manufacturing. The Court noted that there was no material placed on the record to show that the manufacture and sale of the aforementioned goods by Samsung India were dependent on directives issued by Samsung Korea (parent) or even that Samsung India was contractually obliged to manufacture goods on behalf of Samsung Korea. The Court noted that
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