Watson Pharma Private Limited (taxpayer) was engaged in contract manufacturing for its associated enterprises (AEs) and provided contract research and development services to its AEs. For these transactions, the taxpayer was compensated by its AEs on a total operating cost plus arm's length mark-up basis. The transfer pricing officer (TPO) made an adjustment on account of locations savings, purportedly accruing to AEs owing to transfer of these activities from the USA (location of the AE) to India. The Income-tax Appellate Tribunal (Tribunal) deleted the adjustment citing several reasons, notably including the following:
- The taxpayer as well as AEs operated in a perfectly competitive market, and the taxpayer did not have exclusive access to factors leading to location-specific advantages. Therefore, the taxpayer did not have any unique advantage, and there was no super profit arising in the entire supply chain.
- Where local market comparables were available and used, specific adjustment for location savings was not required. Any benefit/advantage to the AE was irrelevant if the profit level indicator (PLI) of the taxpayer was within the range of comparables.
- The Indian chapter of the United Nations Transfer Pricing (UN TP) manual (which amongst other issues also discusses location savings) represents a view of Indian tax administration and is not binding on Appellate authorities.
Source & more info: PwC