Daily Tax Update - January 2, 2015: Indian Tribunal Rejects Transfer Price Adjustment in Microsoft Case

Indian Tribunal Rejects Transfer Price Adjustment in Microsoft Case:  The Delhi Income Tax Appellate Tribunal (Tribunal) rejected an approximate INR 290 million (about $4.5 million) transfer pricing adjustment relating to marketing services provided by the assessee, Microsoft Corporation India Pvt. Ltd., to its US parent and Singapore and UK affiliates.  The dispute centered on determining the appropriate comparables to include in determining an arm’s-length operating margin.  The assessee computed an arm’s-length operating margin of 7.32% based on nine comparables.  The transfer pricing officer computed an arm’s-length operating margin of 21.18% after including five additional comparables, which not only engaged in routine marketing services but also provided high-end marketing services leading to the creation of marketing intangibles, and making other adjustments.  The transfer pricing officer argued that these five companies had been used as comparables by the assessee in the past.  The Tribunal agreed with the assessee that the five companies did not provide comparable marketing services and that the inclusion by the assessee in prior years was not determinative.

An English-language translation of the Tribunal’s opinion (provided by CAinINDIA.org) may be accessed here.

Office Of Chief Counsel Releases Advice on Existence of US Trade or Business:  In CCA 201501013, the IRS Office of Chief Counsel considered whether a fund manager’s lending and stock distribution activities conducted as an agent on behalf of a fund caused the fund to be engaged in a US trade or business.  The Office of Chief Counsel concluded that (1) the nature and extent of the lending and underwriting activities caused the fund to be engaged in a trade or business within the United States; (2) the fund’s lending and underwriting did not constitute “trading in stocks or securities” for purposes of the trading safe harbors under Section 864(b)(2)(A)(i); and (3) even if the fund’s lending and underwriting had constituted “trading in stocks or securities,” the fund would not have qualified for the safe harbors.

IRS Issues Correction to Section 367 Regulations:  In RIN 1545-BK65, the IRS issued a correction to final regulations relating to the consequences to US and foreign persons for failing to file gain recognition agreements or related documents, or to satisfy other reporting obligations, associated with certain transfers of property to foreign corporations in non-recognition exchanges.