Tuesday, 27 September 2016

India: Effects of arm’s length price adjustment on taxable income

The Delhi Bench of the Income-tax Appellate Tribunal found that application of an arm’s length price adjustment to the taxpayer’s intra-group services would lead to the corresponding reduction in the taxpayer’s revenue, and thus deleted a transfer pricing adjustment in respect of the intra-group services.

The case is: Mercer Consulting India Pvt Ltd. v. DCIT (ITA No. 1085/Del/2016)

The taxpayer, a “captive” information technology enabled services provider, followed a transfer pricing policy of marking up its operating expenses by a margin of 20% for invoiced services provided its foreign related parties. 

The tax authorities asserted that a 20% mark-up was less than the arm’s length standard. Instead, the Transfer Pricing Office found that a mark-up of 29.53% was determined to be at arm’s length. Also, a second adjustment was made concerning the cost of the intra-group services that the taxpayer received from its foreign related parties. This cost was found to be “nil.” 

The Dispute Resolution Panel restored the 20% mark-up as being at arm’s length, but did not reverse the adjustment relating to the cost of intra-group services.

The taxpayer sought judicial review by the tribunal, which issued a taxpayer-favorable decision rejecting the position of the tax authorities with respect to the cost of intra-group services.

Source & more info: KPMG