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Real life Practical Examples of the 6th and 7th Methods! A Zambian Revenue Authority publication refers to a more specific version of the 6th Method of benchmarking apart from a residual 7th Method Section 97A(13) of the Zambian Income Tax Act provides a specific method of determining the arm's length price of 'controlled transactions' involving the sale of base metals or any substance containing base metals or precious metals directly or indirectly between the AEs. The applicable benchmarking price in these cases, subject to required adjustments for a discount on account of proof of low quality or grade, shall be the 'reference price' - a term used for the monthly average cash price for the same at the London Metal Exchange Price or any other metal exchange price as approved by the Commissioner General. In simple words, rather than looking for evidence of the actual transactions, the price quoted in an approved commodity exchange is good enough to establish the ALP. That is quite a simplification of the ALP process, and, as I see it, this does fit into the Indian sixth method as well. While, unlike in Zambia, there is no direct legal requirement that this method must apply to the exclusion of all other methods, one possible view could be that the scheme of 'the most appropriate method' under rule 10C makes its being an MAM implicit Several examples of somewhat similar sixth methods regarding generic commodities also exist in many important Latin American jurisdictions. The Indian sixth method may belong to the same genus but is far broader in approach, implicitly covering such a method and much more Interestingly, there is still a residual method (see page 20 ) that provides, notwithstanding the guidance in this note, "a different method may be applied by the taxpayer or the Commissioner General", provided the CG is satisfied that none of the approved methods can be reasonably applied to ascertain the ALP and such other (seventh) method yield the results "consistent with that which would be achieved by independent persons engaging in comparable uncontrolled transactions under comparable circumstances". That provides too high a degree of flexibility that may result in tax uncertainties. On a conceptual note, an undefined residual method can not be used routinely by the tax administration and it has the potential to be used so by a rather aggressive tax administration. It must be sparingly used only to assist the taxpayers rather than to add to their uncertainties. TNMM continues to be, and will always be readily usable as, a method of last resort, though if a taxpayer can show a better alternative, he must be allowed to do so While Zambia is a small jurisdiction and a late entrant to the TP world, one can learn good things, including ZRA's practice of detailed guidelines, from them as well, and ZRA's practice note can be extremely helpful in this endeavour. My compliments to Zambia Revenue Authority (ZRA) for this helpful publication

It was a pleasure writing an article titled 'A Decade of Rule 10AB's Sixth Method; Benchmarking Redefined?", especially for Taxsutra. Thanks, Arun Anandagiri, for inviting me to write the article, and thanks Sujit Fulari for your valuable research assistance and input. When there are competing approaches to an issue in the world of tax laws, as in this case- mainly on the question as to whether the sixth method is a residual method or an additional method, one thing that I have learnt the hard way is that no matter how sound one may think that a particular approach is on the first principles, the outcome of the legal process has an element of serious uncertainty that businesses can ill afford. It is time, therefore, that, as I have concluded in this article, "the conflicting approaches will have to be holistically addressed by appropriate legislative or judicial interventions at some point in time- the sooner, the better'”. https://lnkd.in/gvQXCJXA #Taxsutra #tax #TP #transferpricing #benchmarking #india #oecd #internationaltax #untax

The guarantee Fee does not fit into the definition of interest, confirms the Indian Supreme Court   On 4th October 2024, the Hon’ble Supreme Court of India dismissed a Special Leave Petition filed by Johnson Matthey Public Limited Company, a U K company, challenging the High Court of Delhi order of 28th May 2024. The taxpayer manufactured speciality chemicals, and its Indian subsidiaries were also in the same business. The taxpayer provided guarantees to overseas branches of foreign banks concerning credit facilities extended by Indian branches of those banks to the taxpayer’s subsidiaries in India. The taxpayer and its various Indian subsidiaries executed the Intra Group Parental Guarantee and Indemnity Services Agreement on 29 March 2010. The taxpayer characterised the receipts as interest, considered them sourced from India, and paid tax as per the provisions of Article 12 (interest) of the tax treaty between India and the U.K. The tax authorities disagreed with the characterisation as an interest and taxed the same as other income under Article 23 (2). Aggrieved with the tax authority's decision, the taxpayer unsuccessfully contested it before the Income Tax Appellate Tribunal. The Tribunal held that the guarantee fee does not fit into the definition of interest as available in the Income Tax Act and tax treaty. The Tribunal disagreed with the taxpayer that the fee did not accrue or arise in India. It also did not concur with its position that the fee taxation would be covered under the Business Profit Article. On appeal to the High Court of Delhi, the Court conducted a detailed analysis of the inter-company agreement, transaction, definition of interest in the tax treaty, and court decisions and then agreed with the tax tribunal's analysis and reasoning. The Court held that the taxpayer did not receive the guarantee charges with respect to any debt owed to it by its Indian subsidiary. Therefore, the fee does not fit into the definition of interest. Further, the obligation to pay the fee was incurred in India, in respect of services utilised in India, and agreed to arise regularly as per the stipulations forming part of the Intra Group Agreement. Therefore, income accrued and arose in India. The High Court did not decide on the taxpayer's claim that the guarantee fee qualifies as business income and would not be taxable in India as the taxpayer did not have a permanent establishment in India, as this question was not raised before the Court. Author’s Comments The Supreme Court's dismissal of the SLP closes the issue that the guarantee fee does not have characteristics of interest. The issue of the applicability of Article 7 (Business Profit) is still open, and now, the taxpayers may opt for this alternative argument. #guaranteefee #interest #nonresidenttaxation #incometaxindia #supremecourt #oecdtax #iota #tiwb #ataf #ciat #undptax #untax #bcas #ctc #ifaindia #pronorthmacedonia

The guarantee Fee does not fit into the definition of interest, confirms the Indian Supreme Court   On 4th October 2024, the Hon’ble Supreme Court of India dismissed a Special Leave Petition filed by Johnson Matthey Public Limited Company, a U K company, challenging the High Court of Delhi order of 28th May 2024. The taxpayer manufactured speciality chemicals, and its Indian subsidiaries were also in the same business. The taxpayer provided guarantees to overseas branches of foreign banks concerning credit facilities extended by Indian branches of those banks to the taxpayer’s subsidiaries in India. The taxpayer and its various Indian subsidiaries executed the Intra Group Parental Guarantee and Indemnity Services Agreement on 29 March 2010. The taxpayer characterised the receipts as interest, considered them sourced from India, and paid tax as per the provisions of Article 12 (interest) of the tax treaty between India and the U.K. The tax authorities disagreed with the characterisation as an interest and taxed the same as other income under Article 23 (2). Aggrieved with the tax authority's decision, the taxpayer unsuccessfully contested it before the Income Tax Appellate Tribunal. The Tribunal held that the guarantee fee does not fit into the definition of interest as available in the Income Tax Act and tax treaty. The Tribunal disagreed with the taxpayer that the fee did not accrue or arise in India. It also did not concur with its position that the fee taxation would be covered under the Business Profit Article. On appeal to the High Court of Delhi, the Court conducted a detailed analysis of the inter-company agreement, transaction, definition of interest in the tax treaty, and court decisions and then agreed with the tax tribunal's analysis and reasoning. The Court held that the taxpayer did not receive the guarantee charges with respect to any debt owed to it by its Indian subsidiary. Therefore, the fee does not fit into the definition of interest. Further, the obligation to pay the fee was incurred in India, in respect of services utilised in India, and agreed to arise regularly as per the stipulations forming part of the Intra Group Agreement. Therefore, income accrued and arose in India. The High Court did not decide on the taxpayer's claim that the guarantee fee qualifies as business income and would not be taxable in India as the taxpayer did not have a permanent establishment in India, as this question was not raised before the Court. Author’s Comments The Supreme Court's dismissal of the SLP closes the issue that the guarantee fee does not have characteristics of interest. The issue of the applicability of Article 7 (Business Profit) is still open, and now, the taxpayers may opt for this alternative argument. #guaranteefee #interest #nonresidenttaxation #incometaxindia #supremecourt #oecdtax #iota #tiwb #ataf #ciat #undptax #untax #bcas #ctc #ifaindia #pronorthmacedonia